Relief for Licensed Contractors

California's Fifth Appellate District has finally clarified a long-standing rule that often punished contractors who changed their business organizational structure during the course of the execution of a contract.  Until now, Business & Professions Code section 7031, which precludes an unlicensed contractor from pursuing an action for recovery of sums due, was often utilized by owners who didn't want to pay their contractors.  Prior cases have been interpreted to argue a contractor who changed from, for example, a sole proprietorship to a corporation during the term of a contract with a gap in the transfer of the license by the CSLB, was not licensed "at all times" during the performance of the contract, and therefore, could not pursue payment due.

No longer.  In E.J. Franks Construction, Inc. v. Bhupinder K. Sahota, et al. (6/5/14, 5th District case no. F066327, certified for partial publication), Franks became a licensed general contractor in 1995 and operated a sole proprietorship named E.J. Franks Construction.  He entered into a construction contract with Sahota in September 2004, and began work promptly thereafter.  During construction, Franks incorporated under the name E.J. Franks Construction, Inc., and had his license transferred to the corporation.  When the Sahota project was about 90% complete in the spring of 2006, the Sahotas refused to let Franks complete the work, and hired another contractor to finish the job.

The claim pertinent for discussion here was the Sahotas' claim that Section 7031 was a complete bar to Frank's recovery of sums due.  The Court of Appeal analyzed the statute extensively, commenting its purpose was directed at precluding unlicensed contractors from maintaining actions for compensation; that is, the statute is a deterrent to the practice of unlicensed contracting. 

Here, however, the Court of Appeal held that "at no time was the work on the Sahotas' home performed by any unlicensed contractor."  All of the cases cited by the Sahotas involved execution of construction during periods wherein the contractor was briefly unlicensed, or the license lapsed during construction before being reinstated.  That was not the case here:  "this case involves a licensed contractor and a change in business entity status...applying section 7031 to the circumstances here would lead to absurd results."  The purpose of the statute is to deter unlicensed contractor activity, not to deter "licensed contractors from changing a business entity's status, and obtaining a reissuance of the license to the new entity, during a contract period."

This is good news for contractors struggling with the timing of changing entity status, and securing transfer of the license to the new entity, all while ensuring construction contracts are entered into with the proper entity.  With this important clarification, contractors who are diligent in getting their license transferred with the CSLB should be relieved from this distraction.

Interested in incorporating or establishing an LLC?  Questions?  Comment, or send me an email, and let’s discuss. 

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.